Part II: I have received a collection notice from the IRS: Is it a federal tax lien or tax levy? What is the difference?

by Bryan Miller, Tax Analyst, JK Harris and Company

Lien

As the definition implies, a lien is simply a claim to property by securing payment of tax debt if that asset is sold or liquidated. In essence, the IRS makes themselves your primary creditor to the attached property (as opposed to your mortgage or loan company). A lien will not harm most taxpayers other than their credit report. A taxpayer with a federal lien may not be able to attain a loan or credit; otherwise, the lien simply resides on their credit report to govern equity in the property. If the property is sold with at a gain, the tax lien is paid in whole or in part from the gain. If the property is upside down, the taxpayer may request a discharge of the lien to accommodate the sale. See Publication 783 for the form and instructions on a lien discharge, and Publication 4235 on addresses to send the request by region. Also, a temporary subordination of the Federal Tax Lien can be utilized if you are trying to refinance or restructure a mortgage. For more information and the form, see Publication 784.

In some professions where personal credit affects the business or ability to conduct business (such as partners in law firms, real estate developers) the lien can actually cause unforeseen harm. This is not intentional, and for these reasons, the IRS will consider releasing a lien either temporarily or permanently on a case by case basis. See Publication 1450 for instructions and state by state phone numbers to accommodate this process. (Note: The correct form for withdrawal of a lien is Form 12277.

Remedy

The only remedies for liens are those as described above. For a levy, the answer is to begin working with the IRS in either compliance or resolution. Compliance involves filing all outstanding tax returns, forms, or information for which the IRS may be requesting. A taxpayer must be compliant before seeking a final resolution. The IRS will only resolve the entire scope of the taxpayers’ liability, not just one year or another.

Resolution involves either establishing an installment payment plan, or providing the IRS 3 months of current financial information for qualification purposes. All resolution programs with the IRS have to be qualified for your unique circumstance to determine the ability to pay the back tax debt, provide proof that the debt cannot currently be paid (hardship cases), or determine that the debt can be paid but not in full. The IRS will require Collections Information Statement Form 433-A (for individuals and self-employed individuals), Form 433-B (For businesses), or Form 433-F (short form of 433-A used primarily by those with little income and assets, retirees, etc.).

Seeking professional assistance in divulging financial information to the Internal Revenue Service is highly recommended. The IRS will look at current income, expenses, assets, equity, access to cash-value holdings, retirement accounts, as well as go though bank transactions and the sales or disposition of assets and equity over the past few years. Knowing how the IRS interprets these documents and transactions to render a conclusion is imperative in working out the best tax resolution the IRS will accept under the Internal Revenue Code.

For more information and research on federal tax lien help please click here. For more information on federal tax levy program click here.

I have received a collection notice from the IRS: Is it a federal tax lien or tax levy? What is the difference?

Part one of a two part series

by Bryan Miller, Tax Analyst, JK Harris and Company

Enforced Collections

If you have received notices from the IRS regarding a federal tax lien or notice of intent to levy, you may be familiar with the feelings of panic and frustration that follow. Many taxpayers may be aware that they have a tax problem, but it is usually at this point that JK Harris attains many of our clients.

Most taxpayers perceive any correspondence from the IRS as negative and of equal merit. Not all correspondence from the IRS is negative. These notices happen to be quite negative correspondence in the form of a collection activity effort, however, they are certainly not of equal merit. Some taxpayers may confuse these notices, or may be somewhat familiar with one and not the other. However, most taxpayers are completely unfamiliar with IRS enforced collection activity and therefore do not know what to do or how to handle the situation.

Sound familiar? Understanding what a tax lien and a tax levy is, what it means to you as a taxpayer, and what these two notices affect in real day-to-day practice is essential to understanding one of the most feared collection tactics of the IRS.

To begin in short order, a levy is much more severe than a lien. For a definition from the IRS web site:

A levy is a legal seizure of your property to satisfy a tax debt…A lien is a claim used as security for the tax debt, while a levy actually takes the property to satisfy the tax debt.

Levy

A levy may take two forms, but the result is the same: 1) a levy may forfeit property in your possession, or 2) forfeit your rights to certain property that is held by others. This forfeited property will be used to pay down or pay off your back tax debt. Property in your possession may include a home, vehicle, boat, or business assets. Property that is rightfully owned by you but held by others includes: wages (often referred to as a wage garnishment), retirement account, certificate of deposit, money market account, bank account, professional licenses rental income, accounts receivables, 1099 income, commissions, and any cash value instruments such as loan value on life insurance.

Scary stuff, no doubt. But from all of the above, the IRS regularly uses some tactics more than others in everyday practice. Unfortunately, businesses are more susceptible to damage than an individual taxpayer. For example, individual taxpayers are much less likely to have a home or vehicle seized than a business owner to have assets seized.

Liquidating certain business assets is not the same as depriving someone of their primary residence. Even so for the business owner in most cases, the IRS would only look to liquidate excess, or non-essential assets that should not impede business operations. Taxpayers’ homes are usually only seized in cases of fraud or criminal activity. In either case, the IRS sees this as a last resort effort for such extreme measures to be taken.

Seizure of rights to property is much more common, the top two being wage garnishments and bank levies. These are not as damaging overall, yet very effective and attention grabbing, which is the point. Important to note here: the IRS notification process, for any reason, is via mail to the last known address; it is deemed a taxpayer’s responsibility to update the IRS with current information. So even if you do not receive the IRS notice by either mishap or misinformation through the mail, you will certainly take notice when money is frozen in your bank account, or your employer advises that the IRS has attached your wages. This can not only be embarrassing, but cause many residual issues on top of the IRS problems as well.

A real problem may arise here again for the business owner. If the IRS attaches account receivables (those who owe you money needed to run your operations), the account will have to pay the IRS in lieu of paying the business. This can particularly be a problem if the IRS attaches a major account of a business with only a few accounts, or a single account. Subcontractors or 1099 employees with a single employer fall into this category. Also, freezing a business bank account is no different to the IRS than a personal bank account until it is proven that the account is needed to run business operations. Even then, the IRS may only issue a partial levy release to pay necessary expenses while they keep the rest.

Tomorrow, part two of Bryan’s blog will discuss what a tax lien is, how to tell it apart from a tax levy and what the remedy for each situation is.

Honest Dialogue

by Debbie Bush, Tax Consultant, JK Harris and Company

I would like to share a touching story I had with a client. I was so grateful to help this client with his IRS tax nightmare; he had carried around this burden for many, many years. This gentleman had been afraid for many years. He was about 75 years old when he came in to see me about a tax debt that he had with the IRS. He started telling me about all the horrible things people had told him might happen to him from losing his home to losing his small checking account -he was afraid the IRS would have him living out in the streets. He had no family to depend on and could not survive if the IRS took what little he had.

After listening to my client, I responded by asking if he had any correspondence from the IRS and he said not for a while but did from years ago. He took out an old, worn wallet and carefully opened it. He took out a worn, folded piece of paper that looked to be very old. He handed me the letter the IRS had sent to him about 15 years ago. He said he had filed all of his tax returns on time, but just could not pay his income tax when it was due because he worked small jobs for other people, he had received 1099 income and was barely getting by on what he brought in.

I looked at the letter, then I looked up at this old, fearful man and told him that he had nothing to worry about. You see, the statute had run out on his tax liability and the IRS could no longer collect from him. He looked shocked when I informed him of this and he started crying. I explained to him, the IRS had only so many years to collect back taxes and his tax debt had expired. He asked me what he owed JK Harris. I said nothing at all and he started crying again. This 75 year old man had been walking around for years, fearful of the IRS. He had been carrying this sense of dread and worry with him for at least 15 years; worried he would lose his home or that the IRS was going to come after him. He gave me a big hug when he left. I’ll always remember this man who never technically was a client of JK Harris, but who I was able to help breathe a sigh of relief. I will never forget him, or the sense of relief he felt on leaving my office.

Honest Dialogue

By Antonia Martin, Tax Consultant, JK Harris and Company

Some clients just don’t believe that the IRS can and will enforce collections against them if they ignore the collection letters that keep coming in the mail.

I had one client who had not filed tax returns for a dozen years. The IRS had done a Substitute for Return* for several of the years the client did not file. (The IRS will do a Substitute for Return for you if you have not filed your tax returns. Instead of giving you the deductions or credits you may be entitled to, the IRS will file a return single with the least ideal tax situation you want to be in.) The client came to the appointment he set up with me with a letter showing he had a tax liability of $54,000. He also had a garnishment letter from his employer. I showed him on the table that comes with the garnishment notice how much of his income the IRS would “allow” him to keep and how much of this paycheck the IRS was going to intercept each week – this amounted to the client getting $179, and the IRS getting $2000.

He scoffed at me and said there was no way that would happen, that it could not be that bad. He said I was crazy to ask the amount of money we needed to do all of his past due tax returns and to get a levy release on his wages. He left the office disgusted with me and disbelieving the IRS would take that much of his income.

The very next week, he called me in a panic because his employer had garnished his wages exactly as I had informed him they would. He immediately decided to hire JK Harris to help him get all of his tax returns filed and to get the wage levy released.

* Important note about substitute for returns – it is very important for you to go back and file for any years the IRS may have filed SFRs for you. In some cases, our clients have found they owed very little back taxes – in other cases they owed nothing.

Tax resolution blog adds new feature

by Gina Anton, Director of Corporate Communications

Happy 2011! In the spirit of the New Year and a fresh new start, I would like to introduce a new feature on our tax resolution blog – Honest Dialogue: Stories from our Tax Consultants. Honest Dialogue will feature information from our consultants on what the most common tax issues they see are, the most frequently asked questions they get and stories from the field – situations they’ve seen where we have been able to help our clients with their back tax problem.

Our tax consultants are the second person to speak with our clients (second only to speaking with one of our appointment setters for their appointment), before the actual work begins on our clients’ cases. Often, our consultants are counselor, confidante and friend to their clients who have been burdened with their back tax liability for quite some time. Our consultants are very familiar with the tax issues our clients deal with and are familiar with the fear the client faces of the IRS and its tactics.

In the first installment later this week, one of our consultants, Antonia Martin, will tell us what the top five questions about tax resolution she gets from her clients are and how she answers those questions.

If you have a tax question you would like JK Harris to answer, please submit it to us here or via email at jkharris@jkharris.com.

Happy New Year!

Taxpayers should know the consequences of a federal tax lien

Troy Sholl, Licensed Taxpayer Representative

According to National Taxpayer Advocate Nina Olsen, the filing of federal tax liens by the Internal Revenue Service has risen by 475% since 1999.

What is a federal tax lien? The IRS files a tax lien against your property when you have failed to pay your back tax debt. The IRS must first send out a Notice and Demand for Payment. If you still do not pay your tax liability in full within ten days of receiving the notice, the IRS is allowed to file a tax lien against certain property or assets (and any property you purchase after the lien is already in place) belonging to you. This allows the IRS to protect the interests of the government.

A tax lien is also a public notification that the IRS has a claim on your property. The tax lien protects the IRS as a creditor and allows the IRS to collect its due. Tax liens also give the IRS the right to seize property, and this may happen if you do not take action to begin repaying your tax liability.

Generally, there is little that can be done to prevent the IRS from filing a tax lien against you if you do not pay your tax liability in full. If you can borrow the money and pay off your tax debt, do it. Chances are good you will pay less in interest to the source you borrow from than you will pay to the IRS. Paying your tax debt down below the $25,000 level may help as well, but there are no guarantees.

If you are unable to do this, the IRS will issue a tax lien against you – and once that lien is issued, the impact is long lasting. The tax lien lasts until you pay your tax liability in full or until the statute of limitations runs out, typically ten years.

The filing of a tax lien will appear on your credit report and hurt your credit rating. In fact, according to Olsen’s report the filing of a lien may cause an immediate 100-point drop to your credit score. When a tax lien appears on your credit history, it may prevent you from buying a home or a car, signing a lease, or getting a credit card. Another problem is that many employers now check your credit report. A tax lien could ultimately affect you getting – or keeping – a job you want.

To prevent being hit with a tax lien, the best defense is a good offense. Pay your tax debts off quickly. If you find that you cannot, consult a tax professional to help you resolve your back tax issues. They can help analyze your situation and figure out how to get you back on track with the IRS.

Posted by JK Harris

Offer in Compromise not an overnight solution to back tax debt

By Gina Anton, Director of Corporate Communications

The IRS’ Offer in Compromise (OIC) program is an excellent option for dealing with back tax debt, but it is also one that is often misunderstood by taxpayers. It is common for clients to come to us for assistance with back tax debt, assuming they will qualify for the Offer program. The OIC program allows a taxpayer to settle a tax debt for less than what is actually owed, and it brings the taxpayer back into IRS compliance – meaning they must continue to file their taxes to hold up the terms of the Offer in Compromise.

It’s important for taxpayers to understand two very critical issues about the OIC program: One, not every taxpayer qualifies for it. Two, it can take months and sometimes even more than a year for the IRS to make a decision about a taxpayer’s eligibility for the program.

That’s frustrating for both the taxpayer and for firms like JK Harris & Company that are trying to help people who owe back tax debt. In fact, most of the complaints that have been lodged against us are based on the frustration and anger the clients feel about this process.

Whether you are planning to hire JK Harris & Company or one of our competitors, or you want to attempt to negotiate an OIC on your own, you need to understand the process itself and how long it takes. Here’s the timeline you can expect for this long, arduous process.

It takes:

7 to 28 days from the date of a signed contract for an Offer in Compromise (OIC) to process the contract, submit the Power of Attorney (POA) and request the Master File from the IRS.

30 to 120 days to allow client to gather three months of current financial documents.

1 to 2 weeks to prepare appropriate forms and send to client for final review and signature.

2 to 8 weeks to get signed forms from client and prepare OIC package to be sent to IRS.

1 to 2 weeks to send OIC package to client for them to send to IRS.

2 to 4 weeks to receive response back from IRS, usually requesting updated documentation.

1, 3, 6, 12-plus months for IRS decision. IRS may request additional documentation. The more times the IRS requests documentation or clarification of documentation already sent, the longer it will take for their decision.

Note: Some timeframes are dependent on the client responding in a timely manner, while other timeframes are dependent on the IRS itself.

We often have to ask our clients to send in three month’s worth of financial documents in repeatedly due to the IRS’ requirements for the most recent financial information. The IRS may make this request over and over again to determine the taxpayer’s inability to pay their full tax liability. We must comply with their requests in order to negotiate on behalf of our client. This is why we must ask our clients repeatedly for financial documentation – there’s simply no way around it. Our clients find this frustrating and sometimes think it’s because we’ve lost their paperwork—we haven’t, it’s just that the IRS has taken so much time that the original paperwork gets out of date and they require us to get current information.

When you are looking to file an Offer in Compromise, know that you are getting into a time-consuming process. The Offer program was developed to assist those who cannot pay their full tax liability due to financial hardship. The process is long and difficult, but if you qualify in the end, it will give you a brand new start.

Grateful client thanks JK Harris for saving her from a fate ‘worse than death’

I know when our clients come to us they are beyond stressed out. Carrying around the weight of a tax liability is overwhelming. Our clients are typically facing the unknown – they don’t know if they will ever be able to repay the debt or when the IRS is going to catch up to them and start levying their wages.

Last week, I received a glowing testimonial from a Ms. Claudia Jones of Eunice, LA. She owed the IRS more than $23,000 in back taxes. Her tax problems had been mounting for several years and she did not have the financial ability to pay her back tax debt, so initially, she ignored the problem. (Many of our clients do this because they simply don’t know what else to do when they cannot pay their tax bill.)
When she received an IRS notice stating her wages were about to be levied, she knew she had to act. She saw one of our JK Harris TV commercials and decided to call us.

“JK Harris was a godsend,” said Jordan. “The employees were very helpful in answering all my questions. They do what they say on television; they meet with you face to face, not a phone interview like the other companies.”

Initially, a Professional Staff Report was created specifically for Ms. Jordan. The report was based on her financial situation, and analyzed what options she had for resolving her tax liability. Her financial situation made her a prime candidate for an Offer in Compromise.

An Offer in Compromise is an agreement between the IRS and the taxpayer that allows the taxpayer’s delinquent tax debt to be compromised for less than the amount owed. The offered dollar amount is based on the taxpayers net worth plus their future income potential, in other words, what the taxpayer is actually able to pay.

According to the case specialist who handled Ms. Jordan’s case, Ms. Jordan was single, living with relatives and had no means to repay her IRS liability in full without causing her undue hardship. Ms. Jordan was cooperative in sending JK Harris all of the financial documents needed to negotiate her case. Her case specialist was able to expedite all paperwork to the IRS and meet all deadlines on time. The IRS accepted Jordan’s offer amount of $1,500, saving her $22,311.38.

“JK Harris saved me from a fate worse than death,” said Jordan. “Thank you, JK Harris and Company!”

We are always glad to help – and so glad to help Ms. Jordan get back on her feet.

Golfer Jim Thorpe reaches plea agreement on tax-evasion charges

According to a recent news story, professional golfer Jim Thorpe is expected to plead guilty to two counts of failure to pay income taxes at a hearing in Orlando federal court on Sept. 22, 2009.

Thorpe, a more than ten-time winner on the Champions Tour, is accused of failing to file income tax returns and failing to pay more than $1.5 million in federal income taxes over a three-year period. Under the plea, he faces up to one year in prison, probation, and a fine.

Most people who get behind on their taxes don’t owe the millions of dollars that Jim Thorpe does. And the IRS files criminal charges in only a very small percentage of cases—typically high dollar, high profile situations, where the government feels it can make a case that the taxpayer demonstrated intent to cheat the government.

Even though most delinquent taxpayers are not likely to be the subject of criminal prosecution, the IRS takes the issue of delinquent taxes very seriously—whether you owe a few thousand or hundreds of thousands of dollars. If you have not filed tax returns and/or have failed to pay your taxes, you need to take action now. The longer you wait, the worse the situation will become. The licensed tax professionals and case specialists that are part of the JK Harris tax team can help you get on top of the situation, no matter how much you owe.

Installment agreement helps solve tax problems for Washington man

Luther Steele was unpleasantly surprised to receive an IRS notice telling him he owed $4,012.11 in back taxes.  Steele didn’t know he had claimed the wrong number of exemptions on his pay and his employer had not been taking enough taxes out of his paychecks.  This is a common error, and often times a costly one when it does catch up to you.

Mr. Steele came to JK Harris to assist with this back tax problem.  His case specialist helped him through his situation and got him set up on an Installment Agreement.  The IRS allows taxpayers to pay their tax debt in smaller, more manageable amounts.  The amount of the payment and the number of payments the taxpayer will make is determined by the amount owed, divided into equal monthly payments, plus a one time user fee.

Mr. Steele wrote to let us know that having tax problems was extremely stressful, but thanks to our company, his life is now much better.  This is what we like to hear and why we do what we do.  Our job is to ease the burden of frustration and stress, so that the tax problems at the root of it all can be alleviated.